Is the System Broken?

I occasionally rent a car when traveling for the work that we do. Several months ago, the always helpful staff at the car rental business informed me that they had been informed by “corporate” that their hours of operation were being changed in an effort to cut costs. They would now be opening 30 minutes later in the morning.

For me, this was problematic, since I often needed to leave at 7am – not 7:30 – to arrive where I needed to be on time. The local staff said they had attempted to take the half-hour off of the other end of the day as many more of their rentals were made in the early morning – not in the evening. Their request was not acceptable to corporate. Result – at least one less satisfied and more poorly served customer.

I bring this up as an example of the concept that organizations work best when decisions are made at the level closest to the people being served. This concept is called subsidiarity. Another way to describe it is to say that a higher level of an organization shouldn’t make decisions that can effectively be made at the lower level. The local car rental store is in a much better position to understand its customers and the one-size-fits all approach used by the corporate office didn’t reflect this. The irony is that corporate primary interest (profit) would have been better served by letting the local store make the decision about what part of the day to cut its hours of operation.

 The same principle applies to the process of making decisions about building and funding infrastructure, but our current system doesn’t reflect this reality. The primary sources of funding for infrastructure are collected at the state and federal level – the gas tax or road tolls for roads and general income and business taxes for sewer and water infrastructure funding programs. With this structure, all local governments are essentially required to appeal to higher levels of government to have their infrastructure projects funded. There is at least a large incentive to get your funding that way rather than putting it on the backs of local property taxpayers. As such, there is little incentive or accountability to ensure that the money spent on that infrastructure actually generates additional source of revenue in the future.

Consider: When the source of revenue for infrastructure is a gas tax, road tolls, income taxes and business taxes – shouldn’t the process of building more infrastructure involve serious consideration as to whether the project will result in more of what generates the revenue? Should widening a road have to be justified significantly on whether it will help create more businesses, more wealth, more trade between communities? Or do we just hope that we’ll generate more of these – the “if you build it….” Mentality?

Consider further: If the primary source of revenue for infrastructure were those generated locally – presumably this would have to be property or land taxes, various user fees and general taxes based on economic activity (sales tax) or wealth (income tax) – wouldn’t there be much more of an incentive to ensure that infrastructure projects actually helped create a benefit locally that would help fund the maintenance of the infrastructure over time?

The result of our current system is that we spend vastly more amounts of money building vastly more infrastructure than we would if both the money and the spending decisions were made at a much lower level.

As we evaluate the manner in which we fund infrastructure, is there something fundamentally flawed with the current system – where local governments and even states are essentially dependent on how the federal or state government decides to distribute money collected on their behalf? And where local governments have very limited ways in which they can legally raise revenue on their own? And perhaps most importantly, where there is little built-in incentive to make sure that infrastructure investments have a reasonable expectation of generating increased economic activity and wealth on which (eventually) all such projects must be funded?

We’re not advocating for a complete withdrawal of state and federal governments in local infrastructure projects. They obviously have a role to play in achieving economic and other goals on a statewide, national and international basis. But considering whether their role in local infrastructure decisions is sending the wrong signals and creating the wrong incentives is an idea worth considering closely – especially in these times where traditional revenue sources for infrastructure are in decline and overall state and federal budgets are being squeezed even tighter.

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